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Business

Yellen Stresses that Fed Foresees Gradual Pace of Rate Hikes

Speaking to the Economic Club of New York, Yellen said the central bank is monitoring a global economic slump, sharply lower oil prices and stock market turbulence

U.S. Federal Reserve chair Yellen speaks to the Economic Club of New York in New York, photo: Reuters/Lucas Jackson
1 year ago

NEW YORK — Federal Reserve Chair Janet Yellen said Tuesday that the Fed still envisions a gradual pace of interest rate increases in light of global pressures that could weigh on the U.S. economy.

Yellen did not specify a timetable for further hikes to follow the Fed’s rate increase in December from record lows. She said the risks to the United States remain limited but cautioned that that assessment is subject to “considerable uncertainty.”

U.S. Federal Reserve chair Janet Yellen speaks to the Economic Club of New York in New York March 29, 2016. Photo: Reuters/Lucas Jackson

U.S. Federal Reserve chair Janet Yellen speaks to the Economic Club of New York in New York March 29, 2016. Photo: Reuters/Lucas Jackson

Speaking to the Economic Club of New York, Yellen said the central bank is monitoring a global economic slump, sharply lower oil prices and stock market turbulence, which she said have hurt some U.S. consumers and key economic sectors such as manufacturing. She said that given the risks, the Fed will “proceed cautiously” in raising rates.

Most economists expect no hike at the Fed’s next policy meeting, to be held April 26-27.

Investors welcomed Yellen’s message that the Fed would move slowly in raising rates. Major U.S. stock indexes turned higher after she began her remarks, reversing an early loss, and bond yields dipped.

Yellen noted that the U.S. job market and housing recovery have lifted the economy close to full health despite the risks that remain. She said one factor that has supported the economy has been low long-term U.S. borrowing rates. Those rates have been held down by money flowing into U.S. bonds from global investors, who have scaled back their expectations for the number of Fed rate hikes this year from four to two at most.

The Fed chair said that while stock prices have largely rebounded to where they were when 2016 began, “in other respects economic and financial conditions remain less favorable than they did” in December, when the Fed raised its key rate modestly after keeping it near zero since 2008, when the financial crisis erupted.

Yellen noted that the Fed’s expectations will remain subject to change to reflect any significant changes in the U.S. or international economic outlook.

“I anticipate that the overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited, although this assessment is subject to considerable uncertainty,” she said.

She said she still thought inflation will rise gradually over the next two to three years to the Fed’s target of 2 percent annual increases in prices. Inflation has been running below this level for nearly four years.

But Yellen cautioned that if oil prices began falling again, it could have “adverse spillover effects to the rest of the global economy.”

When the Fed met two weeks ago, it kept its key rate unchanged and signaled the likelihood of just two rate increases this year. That was half the number that Fed officials had envisioned in. As a result, most economists concluded that no rate increase would likely occur before June.

In this Wednesday, March 16, 2016, file photo, Federal Reserve Chair Janet Yellen speaks during a news conference after the Federal Open Market Committee meeting in Washington. Photo: AP/Manuel Balce Ceneta, File

In this Wednesday, March 16, 2016, file photo, Federal Reserve Chair Janet Yellen speaks during a news conference after the Federal Open Market Committee meeting in Washington. Photo: AP/Manuel Balce Ceneta, File

But comments last week from several of the Fed’s regional bank presidents had raised the possibility that the central bank would decide to raise rates in April. One of them, Dennis Lockhart of the Fed’s Atlanta regional bank, said in a speech that he thought the strength of the most recent U.S. economic data could justify a rate increase as early as April. The views expressed by Lockhart, who is viewed as a centrist in his approach to interest rates, was echoed by some other Fed regional bank presidents.

Whatever decision the Fed does make in April will hinge on its view of the economy’s durability. In the past week, some reports have produced weaker-than-expected readings, including a sharp drop in orders for long-lasting manufactured goods and tepid consumer spending. Those reports have led some economists to downgrade their forecasts for growth in the current January-March quarter from a 2 percent annual rate to a lackluster 1 percent.

The consumer spending report also showed that the Fed’s preferred inflation gauge is still signaling that inflation remains well below its target level. For the 12 months that ended in February, inflation rose just 1 percent. “Core” inflation, which excludes the volatile items of food and energy, increased 1.7 percent.

Because of the subpar inflation and the weakness in consumer spending, which drives about 70 percent of economic activity, many economists still say the Fed will be cautious about raising rates.

“The numbers show that inflation is nowhere to be found, and consumers at the moment are on strike,” said Sung Won Sohn, an economics professor at California State University, Channel Islands. “They don’t want to spend money because of uncertainty in the economy, including the recent volatility in the stock market.”

Sohn said he thought the economic outlook remained too uncertain to justify any rate hikes at all this year.

“I don’t think either the global economy or the U.S. economy are on a sound track at the moment,” he said.

MARTIN CRUTSINGER
CHARLES SHEEHAN

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